Montmelo Pty Ltd v the Shell Co of Australia No. Scgrg-97-589 Judgment No. 6254 Number of Pages 8 Equity

[1997] SASC 6254

IN THE SUPREME COURT OF SOUTH AUSTRALIA

DOYLE, CJ

Equity - equitable remedies - injunctions - application for an interlocutory injunction to restrain defendant from terminating 'Shell Force agreement' - whether serious question to be tried - whether provisions of Petroleum Retail Marketing Franchise Act, 1980 applicable - whether damages adequate remedy - whether balance of convenience favours the plaintiff - Application for interlocutory injunction successful. Petroleum RetailMarketing Franchise Act, 1980 (Cth) , referred to. Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148, applied. Aboriginal Development Commission v Ralkon Agricultural Co Pty Ltd (1987) 74 ALR 505, discussed. STA v Apex Quarries Ltd [1988] VR 187; Mobil Oil Australia v Brindle (1985) 62 ALR 89, considered.

ADELAIDE, 2, 16, 29-30 May 1997 (hearing), 17 July 1997(decision)

#DATE 17:7:1997

#ADD 28:7:1997

Appearances:

Plaintiff:

Counsel: Mr J Wells QC with him Mr R Kennett

Solicitors: Kelly & Co

Defendant:

Counsel: Mr N Swan with him Mr T Jarvis

Solicitors: Finlaysons

Order: application allowed.

DOYLE CJ

This is an application for an injunction pending trial.

On 18 April 1997 Millhouse J granted an injunction by way of an interim injunction, and adjourned the application for an injunction pending trial.

That application has now come before me. A number of affidavits have been filed, and I heard submissions on several occasions. Some of those submissions related to matters that I consider are no longer of significance, and I propose to ignore them.

The matters that an applicant for such an injunction must establish are well known. I must be satisfied that there is a serious question to be tried. I must also be satisfied that if the injunction is not granted the plaintiff will suffer loss, and that damages will not be an adequate remedy. An alternative way of putting that requirement, which may be slightly different, is that I must be satisfied that it is not just that the plaintiff be confined to a remedy in damages: see STA v Apex Quarries Ltd [1988] VR 187. I must also be satisfied that the balance of convenience favours the grant of the injunction.

As authority for these propositions, although authority is hardly needed, I refer to Castlemaine Tooheys Limited v South Australia (1986) 161 CLR 148 at 153 Mason ACJ.

There is an element of ambiguity, or at least flexibility, in the concept of a serious question to be tried. As the Full Federal Court said in Aboriginal Development Commission v Ralkon Agricultural Co Pty Ltd (1987) 74 ALR 505 at 509-110, the test is to be applied by reference to all of the circumstances of the case.

The application which is made relies, in part, upon the provisions of the Petroleum Retail Marketing Franchise Act, 1980 (Commonwealth) ("the Act). Section 21 of the Act gives the Court power to grant an injunction. The Court has power to grant an interim injunction if "...in the opinion of the Court it is desirable to do so": s21(3).

It may be that the exercise of that power is not limited by the principles which apply to the exercise of the Court's inherent jurisdiction to grant an injunction.

But, even if that is so, I do not think that that makes any substantial difference in the present case. I do not consider that it would be desirable to grant an injunction unless the plaintiff has an arguable case, is likely to suffer harm not adequately compensable by damages, and unless weighing up the impact of the injunction on the defendant against the likely consequences for the plaintiff of the refusal to grant an injunction, it appears on balance desirable that the injunction should be granted. However, it may be that s21(3) enables one to be somewhat more flexible. But, as I have already said, I do not think that in the present case the outcome will differ depending upon the source of the power to grant the injunction.

Moreover, as will appear, one of the major issues in this case is whether the Act applies to the case. That being so, it is open to argument whether the power under s21(3) is able to be exercised by me.

For all those reasons, I take what I might call the traditional approach.

I will now summarise the facts.

The plaintiff occupies and operates a Shell Service Station at Tailem Bend.

It does so pursuant to an Agreement which came into operation on 1 July 1995. The Agreement was by way of renewal of and a replacement of an earlier Agreement.

The agreement is called the "Shell Force Agreement ("the Agreement").

Schedule Three to the Agreement designates the plaintiff as a Motor Fuel Agent. The effect of the Agreement, and in particular Clause 5(2), is that the plaintiff receives, holds and sells motor fuel as agent for Shell and not as a purchaser from Shell. That, at least, is how the Agreement has operated to date.

Clause 5(1) of the Agreement deals with franchisees who conduct business as independent contractors. Such a franchisee purchases motor fuel from Shell for resale by the franchisee.

By Clause 23(2) of the Agreement the plaintiff, because it sells as agent for Shell, is required to deposit in a nominated bank account each business day to the credit of Shell the total value of sales of petroleum products sold on the previous business day. The plaintiff is also required, on a daily basis, to forward to Shell a record giving details of the sales of products made from the premises on the previous day.

These provisions, no doubt, reflect the fact that because the plaintiff sells as agent for Shell, the fuel being sold and the sale proceeds are respectively the property of Shell and moneys in respect of which the plaintiff is liable to account to Shell. In the case of such a franchisee Shell does not have the ability to protect itself by requiring, if thought appropriate, cash on delivery of product for sale.

It is not denied that for some time the plaintiff has been consistently late in complying with these obligations under the Agreement.

Shell has complained about this to the plaintiff.

A letter dated 20 November 1996 from Shell to the plaintiff called upon the plaintiff to comply with the Agreement. Dealings between Shell and the plaintiff since then must have indicated to the plaintiff that Shell was concerned about the state of affairs.

The plaintiff complains that it cannot comply with its obligations under the Agreement. Some of the sale proceeds or takings include sales made by Shell Card. Payments for sales made using the Shell Card are made directly to Shell by the purchaser. Under the Agreement Shell pays the value of Shell Card sales and a commission to the plaintiff in respect of such sales. The payment is to be made by Shell within 3 or 5 business days of the receipt by Shell of records of the sales. The plaintiff complains that the obligation to deposit the daily takings is unreasonable insofar as those takings include sales made by way of Shell Card. The point is, the plaintiff says, that the plaintiff is required to deposit moneys that it has not received, being moneys that Shell will receive directly from the purchaser. The plaintiff complains further that Shell has added to the plaintiff's problems, by being late with its remittances under the Agreement to the plaintiff in respect of sales made by way of Shell Card.

Shell says that these are common business terms in the trade, that sales by way of Shell Card are less than 50% of the total sales, and Shell further denies that there have been defaults on its part in the remittance of payments due to be made by it. A schedule to an affidavit filed by Mr Veitch, the accountant for the plaintiff, does appear to indicate that Shell has not been in default, particularly when one allows for delays on behalf of the plaintiff in forwarding records of sales and in depositing sale proceeds.

The plaintiff also complains that Shell has varied the commission payable to the plaintiff under the Agreement in a manner that is either in breach of the Agreement or which demonstrates that Shell was guilty of misleading and deceptive conduct when, before the Agreement was entered into, certain representations were allegedly made as to the level of commission that would be paid to the plaintiff if it entered into the Agreement. This also is said to have contributed to the plaintiff's inability to make timely payments to Shell.

The plaintiff further complains that, when the Agreement was entered into, it was told by Shell, by letter dated 3 June 1995, that apart from certain matters the Agreement was identical to the then current Agreement. In fact, the termination clause under which Shell has acted is not the same as the termination clause in the previous Agreement. However, in that context I note that the plaintiff's previous solicitor certified in writing on 11 July 1995 that he had explained the Agreement to the plaintiff. Other correspondence between the parties shows that the plaintiff gave detailed consideration to the terms of the Agreement before it was entered into.

It is in that context that, by letter dated 17 April 1997, Shell terminated the Agreement with effect from 18 April 1997 at 4.30pm. The termination was on the grounds that the plaintiff had failed to bank the payments in respect of sales at the times required under the Agreement, and on the further ground that the plaintiff had failed to provide sales information as required by Clause 23(2)(b).

The business conducted by the plaintiff is a substantial one, involving the employment of a significant number of people.

The plaintiff seeks an injunction under the Act and under the Court's inherent power to grant an injunction.

The provisions of the Act are complex.

The initial question is whether the Act applies to the Agreement.

By s6(1)(a) of the Act, the Act does not apply unless the Agreement contains provisions of the kind referred to in the definition of "franchise agreement" in s3(1) of the Act.

Briefly, to be a franchise agreement the Agreement must contain certain provisions. It must contain a provision relating to the use at the relevant premises of a mark association with or controlled by a corporation. There is no doubt that that requirement is satisfied, this being a Shell Service Station.

The next requirement is that the Agreement make provision for the plaintiff to possess, occupy or use the premises to which the Agreement relates in connection with the retail sale of motor fuel. The third requirement is that there must be provisions under which a corporation is "accustomed, entitled or required to supply motor fuel to a person .....for retail sale by that person at the premises to which the Agreement relates." In this case, the corporation is Shell.

The issue which, in this case, determines whether the Act applies to the Agreement, is whether the Agreement is one under which the premises are used in connection with the retail sale of motor fuel, and under which Shell is entitled or required to supply motor fuel to the plaintiff for retail sale. This is the central issue because, by s3(5) of the Act, a reference to retail sales in the definition of "franchise agreement" is not to be read as including retail sales by a person as servant or agent of another person.

It follows that sales of motor fuel made so far are to be disregarded, because they were sales by the plaintiff as agent of Shell.

But, the plaintiff argues, the Agreement is also one under which Shell is entitled to supply motor fuel to the plaintiff for retail sale (as principal), and the plaintiff is able to require Shell to do so. Thus, the plaintiff argues, the Agreement falls under the Act.

Shell argues that under the Agreement the plaintiff is designated as a motor fuel agent (as it is) and, by Clause 5(2) of the Agreement, agrees to handle motor fuel as agent of Shell, not to sell motor fuel on its own behalf, and agrees to sell motor fuel for and on behalf of Shell and not on any other basis. Accordingly, Shell argues that sales made at the premises are not retail sales for the purposes of the Act and accordingly the Agreement is not caught by the Act.

In addition, Shell argues that the clause just referred to makes it clear that the Agreement contemplates and allows only sales as agent for Shell, and that under the Agreement there can be no sales by Shell to the plaintiff for resale by the plaintiff. Thus, the basis upon which the plaintiff brings the Agreement under the Act is not made out.

The plaintiff meets this contention by arguing that although the plaintiff is designated as a motor fuel agent, the effect of the Agreement is that it is nevertheless entitled to, and may be obliged by Shell to, purchase petroleum products for resale as principal and not as agent. It argues that certain clauses, such as Clause 20(1) and (2), and Clause 23 distinguish between purchase for resale and purchase as a motor fuel agent, but that on the other hand there are clauses which draw no such distinction and which have the effect that Shell may require the plaintiff to purchase motor fuel for resale or that the plaintiff may require Shell to sell motor fuel to it for resale.

In particular the plaintiff's submission focussed on clause 20(3) which provides that the plaintiff agrees:

"To purchase from Shell and to maintain at all times sufficient stocks of Shell petroleum products to ensure adequate and prompt supply to customers."

The plaintiff also points to clause 21 of the Agreement which provides that Shell will sell to the plaintiff the quantities of petroleum products that the plaintiff may order from time

to time and that are reasonably required for the purpose of the business of the plaintiff at the premises.

Both clauses, unlike certain other clauses, apply to franchisees of all classes. This, says the plaintiff, is deliberate.

Read literally, these provisions do appear to envisage the plaintiff acquiring petroleum products under the Agreement for resale and not as agent for sale, either at the requirement of Shell or at the plaintiff's own requirement.

The plaintiff argues that these clauses, applying as they appear to do to all classes of agents, have the effect that Shell or the plaintiff may to bring about the supply of motor fuel to the plaintiff for sale by it other than as agent for Shell.

Shell countered this argument by pointing to clause 5(2)(b) of the Agreement, referred to above, which provides that the plaintiff

"....shall not be entitled to sell on its own behalf any Shell motor fuels at or from the premises and any such Shell motor fuels sold at or from the premises are sold for and on behalf of Shell."

Shell also argued that clause 5 clearly distinguished between a franchisee who is a motor fuel agent and other types of franchisee.

The plaintiff in turn countered that this clause must be read as limited to motor fuel supplied to the plaintiff as agent for sale, and as not applying if and when the plaintiff acquired motor fuel as principal for resale. Alternatively, the clause was void because it attempted to prevent the plaintiff from selling motor fuel that it could be obliged by Shell to purchase or that it could require Shell to sell to it.

In short, the argument of the plaintiff was that although in its application to date the Agreement was an agreement for the sale by the plaintiff of motor fuel as a motor fuel agent, the provisions of the Agreement were such that Shell could be required to supply motor fuel to the plaintiff for resale by the plaintiff, and such that Shell was entitled, in the sense it had the right, to supply motor fuel to the plaintiff not as agent for sale but for resale by the plaintiff.

Shell argues that clause 5(2) is the governing clause, and categorises this Agreement as exclusively for supply and sale as an agent. It argues that by implication or by construction the clauses referred to are to be read as inapplicable to a motor fuel agent.

I must say that I regard the argument advanced by the plaintiff as somewhat artificial. In a number of respects the Agreement appears to me to assume that the basis upon which the plaintiff sells motor fuel will not alter. I am inclined to think that most of the plaintiff's contentions can be answered by an argument that in drawing up an Agreement to cover a variety of situations the drafter has, on occasions, failed to distinguish adequately between clauses that apply in all situations and clauses that apply only when the franchisee has a particular designation.

However, I have come to the conclusion that, notwithstanding its somewhat artificial air, the submission advanced by the plaintiff does give rise to a serious question within the meaning of the authorities.

By this I mean that there is a tenable argument advanced by the plaintiff. Its ultimate outcome will require careful consideration of the whole Agreement. Moreover, the argument is one that is of considerable significance in terms of the rights of the parties. If sound, the Act applies, and a number of possible remedies become available to the plaintiff. If unsound, the Act does not apply at all. The result of the argument is thus central to the rights of the parties. To reject the argument now as not raising a serious question will, effectively, deny the plaintiff the protection that the Act offers to a franchisee in the plaintiff's position.

For those reasons, related to the merit of the argument and its significance in the case, I conclude that there is a serious question to be tried.

The plaintiff argued that quite apart from the Act there was a serious question to be tried as to the entitlement of Shell to act as it did. The plaintiff relied upon two matters. First, an allegation by the plaintiff, already referred to by me, that before the Agreement was entered into representations were made to the plaintiff that commission would be paid to the plaintiff for the life of the Agreement at a certain level, and that subsequently commission payments have been reduced below that level. The argument was that although under clause 51(1)(a) of the Agreement, Shell can vary commission arrangements at any time, the effect of the representation was that they would not be varied. The plaintiff argues that the reduction in the commission payable to the plaintiff has brought about a situation in which the plaintiff has lacked the cash flow to make timely bank deposits under the Agreement, and that in that way the misleading and deceptive conduct by Shell has brought about the situation in which Shell now alleges that the plaintiff is in breach.

Shell, not surprisingly, denies this allegation. It points to the fact that after the alleged representation was made, the plaintiff executed the Agreement with a clause providing for commission at a lower rate.

On the limited information available, I do not consider that there is a serious question to be tried on this point.

The plaintiff also relied upon the alleged late payment by Shell of commission due to the plaintiff in respect of sales made by way of Shell Card. On the evidence available to me, and I refer again to the schedule exhibited to the affidavit of Mr Veitch, I do not consider that there is a serious question to be tried in relation to this allegation.

If the Act applies the plaintiff is entitled to thirty days' notice of termination of the Agreement: s16(3)(a). Such notice was not given.

Moreover, the plaintiff having sought relief, if the Act applies the Court may not declare the Agreement terminated unless satisfied that termination is just and equitable in all the circumstances: s16(6).

Although it seems to me that the plaintiff has to some extent brought its problems upon itself, by failing to grapple sooner with its payment problems, the substantial investment by the plaintiff in the business, the disastrous financial consequences of the sudden termination of the business, and the suddenness of Shell's action (despite the warnings) cause me to conclude that it is quite arguable that termination would not be just and equitable under all the circumstances. I remind myself that an object of the Act is to give security of tenure to station operators: Mobil Oil Australia v Brindle (1985) 62 ALR 89 at 90, 94 and 96.

In short, if the Act applies the plaintiff has a reasonable prospect of obtaining a remedy in respect of the termination by Shell.

I accept that the plaintiff would have a remedy in damages if Shell is in breach of the Agreement, and that Shell has the capacity to pay. But quantification of the loss is likely to be difficult. Destruction of an existing business has all sorts of flow-on effects which can often be difficult to prove and more difficult to quantify. Moreover, if it is a relevant matter, I consider that confining the plaintiff to a remedy in damages may not be just in all the circumstances.

For those reasons I consider that if an injunction is not granted the plaintiff is likely to suffer loss for which damages will not be an adequate remedy.

As to the balance of convenience, I consider that that favours the grant of an injunction, on a basis which will ensure as far as may be compliance by the plaintiff with its obligations under the Agreement and also ensure a prompt trial. The grant of the injunction does expose Shell to the risk of further loss, due to further defaults by the plaintiff. The amounts could be substantial. But to refuse the injunction will mean that the plaintiff's business, a significant asset, will be destroyed. As I have already said, that will have serious consequences, and can cause loss not easily quantified.

I acknowledge the fact that this would be to force Shell to deal with and to supply an agent in whom it has lost confidence. However, requiring compliance with the Agreement meantime, as the interim injunction granted by Millhouse J does, ensuring a prompt trial and giving liberty to apply provides adequate protection under all the circumstances. There is a risk of the Court being drawn into a series of arguments between the parties in relation to the Agreement, but that is a risk that has to be faced.

I have not overlooked the fact that if Shell is kept out of the possession of its premises it loses the opportunity to install another operator and, possibly, make better use of the premises. However, during the period of the injunction the interests of the plaintiff and the interests of Shell will coincide, in the sense that it will be in the interests of each of them to maximise the sales of motor fuel through the site. I do not think that the risk of loss to Shell, loss which cannot be recovered from the plaintiff, is such that I should decline to grant the injunction.

For those reasons I propose to grant an injunction pending trial.

I will grant the injunction in terms of paragraph 1 of the Minutes of Order submitted to me by the solicitors for the defendant with their letter of 12 June 1997.

I will hear the parties as to the terms of the order, but indicate that I am disposed to make further orders as follows.

First, orders in terms of paragraphs 2, 3, 4, 10, 11 and 12 of the Minutes just referred to.

Secondly, I am disposed to make the grant of the injunction conditional upon the execution of an undertaking in writing by Geoffrey Thomas Stripp and Margaret Elizabeth Stripp, the undertaking to be in the terms of paragraph 5 of the Minutes just referred to.

I am also disposed to require Mr and Mrs Stripp to undertake in writing to continue to operate the business in good faith and to conduct the business diligently.

As to the orders sought in paragraphs 6 to 9 of those Minutes, I wish to hear from the parties.

I will, of course, hear from the parties on any other matters relevant to the terms of the injunction.

I have already directed that this action be dealt with pursuant to Rule 50 of the Supreme Court Rules, and that the plaintiff make application to Master Burley for directions to secure a speedy and economical determination of the proceedings.